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Server misfire dampens IBM's Q2

Profits up, hardware stuck

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IBM could solve two problems at once by getting its global services division to fix the server division's manufacturing woes. The IT giant today reported that weaker services revenue coupled with a derailed server supply chain hurt second quarter revenue. All told, however, IBM beat out analysts' expectations and pleased investors.

IBM reported revenue of $21.9bn, which marks a 2 per cent decrease from the same quarter last year. The last year figure includes PC sales, and IBM has since spun off its PC unit to Lenovo. With the PC results factored out, IBM's revenue rose 1 per cent year-on-year during the second quarter.

The grizzled tech warrior also posted a profit of $2.02bn or EPS of $1.30, which is a healthy increase over the $1.83bn profit and EPS of $1.12 reported last year during the same period.

Both the revenue and EPS figures beat out the consensus analyst expectations by a whisker.

IBM's results would have been more impressive, according to CFO Mark Loughridge, had the vendor's server manufacturing system worked as planned.

"In servers, execution issues in our supply chain left some orders unfulfilled," Loughridge said, during a conference call with Wall Street analysts.

IBM's hardware revenue fell 3 per cent during the second quarter to $5.1bn, excluding PC sales. Unix server revenue dipped 10 per cent with customers apparently waiting for the expected Power5+ upgrade. IBM hopes to complete the shift to faster Power5+ chips and four-core modules by the end of the third quarter, Loughridge said. Sales of x86 servers were flat, mainframe sales were up 7 per cent, and storage fell 2 per cent.

Services revenue dipped as well, falling 1 per cent to $11.9bn.

IBM called on analysts to appreciate its diverse business rather than focusing on the lackluster hardware and services units.

"While our hardware and services didn't perform to expectations, we had solid software performance," Loughridge said.

The WebSphere and Tivoli lines carried IBM's software group to a five per cent revenue rise or $4.2bn in sales.

The results from IBM seemed to comfort investors who have seen SAP, AMD and others lower their forecasts in recent weeks. Loughridge, however, noted that enterprise customers in the last month have grown more cautious about making large purchases. That's bad news for the IT giant set.

"We have seen that the sales cycles for enterprise clients appear to have lengthened," he said.

IBM provided little insight into the supply chain problems that affected the server unit other than to say midrange shipments were particularly hard hit by the snafu. You can expect some more dirt on the supply chain debacle to emerge in the coming days.

Investors sent IBM's shares slightly higher in the after-hours markets, following the release of the second quarter results. At the time of this report, IBM sat at $75.47 per share. ®

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